The hospital industry is in the doldrums. For confirmation, just look at the small premium the private equity guys offered to purchase the largest player in the space, HCA (NYSE:HCA). However, from a value investor perspective, the bid could confirm that negative industry trends and sentiment may have reached their peak.
The HCA bid did little to shock rural hospital operator HMA (NYSE:HMA) back to life. HMA CEO Joseph Vumbacco also confirmed that his company was not in talks with private equity firms, not that the stock moved up in hopes that a deal was on the horizon.
HMA released earnings on Tuesday, meeting previously reduced guidance, which confirmed that weak volumes and bad debts continue to infect results. If you recall, about a month ago, HMA reduced 2006 earnings guidance to $1.30-$1.34 per share when analysts had originally projected $1.43. The reduction was attributed to weak patient volumes and bills that went unpaid by uninsured patients treated at its hospitals, conditions that have plagued hospital operators for some time now.
HMA does have higher operating margins than the industry on average, but it's also having its fair share of patient difficulties, as those with no insurance are unable to pay, while those with insurance appear to be holding off on procedures as they are being required to pay higher upfront, or co-payment charges. I'm also concerned because, if this instability is occurring when the economy is relatively strong, what happens if the domestic market heads south?
HMA appears to have reserved for most of the unpaid bills from its uninsured clients, and operating cash flow is holding up for the most part. For the second quarter, cash flow from operations fell only about 3% from last year's quarter. However, internal growth has been weak, leaving HMA dependent on riskier acquisition growth, although on Monday it announced that it was selling three hospitals, though financial terms weren't disclosed. And on a post-earnings conference call, the CEO stated there would be no further acquisitions for the rest of 2006.
Judging by recent events, conditions remain tough in the hospital industry. The majority of hospital stocks are stuck near their lows for the year, including another rural operator -- LifePoint Hospitals (NASDAQ:LPNT), which is set to release earnings this Friday. Additionally, the hospital industry has high capital expenditure needs with high levels of government regulation. Though the HCA bid did little to breathe life back into the industry, it should at least provide some support from multiples falling any further.
As long as the hospital downturn is cyclical rather than secular, meaning the negative trends in the industry are temporary instead of indicative of fundamental deteriorations in the ability of firms to grow or generate cash flow, then investors may want to consider other hospital companies such as Triad (NYSE:TRI), Universal Health Services (NYSE:UHS), or acute-care operator Community Health Systems (NYSE:CYH). However, I'd still steer clear of Tenet Healthcare (NYSE:THC), which has been working through a number of company-specific matters and is the clear value trap of the bunch. Whether the other firms constitute values or value traps remains to be seen.
For more related Foolishness:
Give your portfolio a shot in the arm with a subscription to Motley Fool Inside Value . Wall Street writes off sickly-looking stocks every day, but Fool value guru Philip Durell can help you diagnose the companies poised for a full recovery. Check out his entire list of current picks with a free 30-day guest pass.
Fool contributor Ryan Fuhrmann is long shares of HMA but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to discuss any companies mentioned further.
